#toyota

Political expediency will trump Coronavirus market rout. Await market manipulation

MARKETS YTD

Share markets have been decimated in recent weeks across the globe. This year to date (YTD) chart above shows the extent. It shouldn’t really have taken Coronavirus or plunging oil prices to lead to this. We’ve been living high on the sauce for two decades and even though GFC in 2008 was a rude hangover, our authorities thought doubling down on all those free money excesses would work again.

Let’s not get too carried away. On a 5-yr basis, shares haven’t exactly blitzed with the exception of the S&P500. The ASX has put on just under 7% in 5 years. Germany, Japan and Italy have gone down. So if one is 45% higher than 5-yrs ago with an S&P fund, is that a mass hysteria moment?

INDEX 5YR

Automotive stocks have been dud investments over the last 5 years. It didn’t take Coronavirus to expose the underlying trends. BMW is don 52% on 5 yrs ago. Ford down 60%. Volkswagen -40%.

Car stocks

Industrial bellwethers like Caterpillar and GE have also not escaped stagnation. YTD, all of these stocks have bloody noses. Boeing has held up surprisingly well despite the MAX problems.

Industrials

Yet if we look at the FAANGs (Facebook, Apple, Amazon, Netflix & Google), we can see that over 5 years, investors have made a bundle.

FAANGAs these 5 stocks make up 15% of the S&P500 Index by weight, if they fall the impact is greater. With the exception of Netflix, these monsters are down 15~20%.

FAANG 1M

Worried?

Fear not, our heavily indebted incompetent political class and complicit central bankers will concoct a new potion of even lower rates, more QE and further fiscal spending on wind farms, solar panels and roads to nowhere to keep the ship afloat. It may be a hapless task in the long run but just watch the printing presses move to full speed. The ride is about to get interesting.

We’ve been bearish for years based on the underlying tenet that financial market manipulation by authorities has merely distorted the most efficient clearing mechanism -free markets. The invisible hand will eventually win. Just not quite yet.

Italian Senator and former Deputy PM Matteo Salvini has called for a ban on short selling. Why? All he’ll do is exacerbate the sell-off by diverting capital from Milan to London. The politicians just don’t get it. That is why Milan FTSE All-Share index fell by 10.75% overnight. That market is down 23% YTD.

When the pandemic hit the economy, we should have known from last month that it would spread and impact global travel, trade and oil prices. Why did it take so long?

We wrote last week that the explosion in market chasing (especially levered) ETFs would exacerbate distortions on the downside. The main reason being is that options markets that hedge levered products see heavy delta bleed (pricing blowing out) during routs. The reason is in bull markets human nature is more comfortable taking risk. In bear markets, people panic hence needing larger insurance premiums to protect against the madness of crowds.

Essentially what that means is that when ETFs were a far smaller chunk of the market, today’s 7.8% drubbing may only have been -4% in equivalent terms. That is because the ETFs chase, not lead markets because their product design is to replicate the immediate past. Yet our first instincts are to compare these apples with oranges and equate them to 2008. Wrong. Furthermore, a larger part of the market is dominated by a smaller

So the question is, do we liquidate all of our shares into the falling knife or take the view that some wonderful opportunities will present themselves to get exposure to what we hopefully viewed as sensible long term investments.

We take the latter view. We need to separate Coronavirus (the disease) and the hysteria (eg hand sanitizer and toilet paper panic buying).

While the disease is problematic and will hit the economy hard in the coming quarters, the question is market hope pinned to government response will come back. The measures should continue to grow and grow until they have cauterized the wound. After all, we live in a market where financial TV programs are summoning the opinions of NY Mets baseball pitchers for their ideas on stocks.

Of course, it will be all academic, but confidence is the only thing that matters from here. As soon as we get on top of Coronavirus, markets will swing back into action and many will simply fall for the same tricks like Pavlov’s dog and the short squeeze will send stocks powering back.

Governments now have a legitimate excuse to blow out deficits and borrow to save us. In that sense, this pandemic is a blessing in disguise. That isn’t to trivialize Coronavirus but to note that politicians will do almost anything to stay in power, even if the long term consequences will linger long after they’re out of office.

Where will they spend? The automotive sector has been in the doldrums for ages. Expect to see EV related subsidies which will be a boon for the EV battery plays – we’ve bought Jervois Mining (JRV.AX) which is about to start a cobalt mine in Idaho.

Think of support to the aviation industry when the crisis is under control. Boeing and Airbus. Don’t forget that American Airlines renewed 900 aircraft soon after it announced Chapter 11 bankruptcy back in 2011.

Think construction – cement companies and construction machinery companies tend to benefit from public works programs. We continue to hold gold (have done since 2001) as the ultimate insurance policy when the whole system can no longer heal with band-aids.

So get ready to buy some bargain-basement names with cash flow survivability, especially if you have a self-managed super fund.

Yes the underlying economic backdrop is dreadful but there will be one last hurrah!

Colonialism and Comcars

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Senator Mattias Cormann has admitted he was behind the decision to change the colour of our government Comcars – which ferry politicians around – from white to dark grey in order to remove any remnants of our colonial past, which in his words were “a better reflection of a modern, forward-looking Australia.” Forget the fact that most government cars were painted black, including Sir Robert Menzies’ Bentley (above). Might have been better to channel the founder of the Liberal Party as inspiration instead some woke nonsense. Or just let the drivers, who need to clean and maintain the vehicles, choose. 

Seriously though, what % of Australians have ever thought that our white Comcars harked to a colonial past? Best put it to a plebiscite and waste more time. 

Dark Grey? Isn’t that a gloomy hue? Should Aussies prepare for dark days ahead? Truth be told the colour is probably quite representative of where our economy is heading, even without coronavirus.

Interestingly, according to car insurer youi,

Our accident frequency research reveals that dark coloured cars are more likely to be in an accident than lighter coloured cars, likely because they are less visible to other drivers on the road. Grey coloured cars topped the list, followed by black and charcoal.

Who says that politicians don’t make sacrifices for us?

If we study where the proportion of cars coloured in colonial white is highest, perhaps parliament should be spending up big on a reeducation program in Tasmania for their unconscious colonialism. youi claimed,

Tasmania has the highest percentage of white cars at 33.80% versus the national average of 30.45% (silver 19.4%, blue 11.29%)

White cars seem to be connected to toxic masculinity too. Best run a campaign on unconscious sexism if youi is to be believed.

Compared to females, white is more popular for males relative to other colours (34.34% for males, 26.46% for females)

Take it a step further and question how much more Cormann could have done to reduce the racist footprints of colonialism.

Why are we buying cars from a maker that powered the Nazi Luftwaffe, SS and Wehrmacht, based in a nation that at the time was hell-bent on world domination and genocide? If we went for Lexus or Toyota we’d be buying cars built by a country that was also determined to colonize The Pacific. Jaguars or Range Rovers would be off the list, even though the Indians now own the brands. Rolls-Royce & Bentley are German-owned. Italians were colonialists. Maserati, Fiat, Lancia and Alfa Romeo banned. The French? Colonialists. Renault and Peugeot-Citroen are out. The Spanish? Colonialists. No SEATs, although that is owned by the Germans. America? Someone is bound to raise an issue with their CIA operative endorsed post-war military hegemony. So no Caddies, Fords or GM cars, especially after the axing of the Holden brand. China? Buying Haval or Great Wall cars would at the very least cut down on the overall cost of Comcars, especially with the generous 10-yr unlimited kilometre extended warranty.  That is how we cut the budget deficit. 

Maybe we should just buy Volvos. Maybe that way we could appeal to be supporting the home team of climate activist, Greta Thunberg to shore up the youth vote while acknowledging that the Viking hordes of 1000 years ago was far back enough in history to upset anyone today. If we’re lucky, the Swedish Riksbank may consider buying our sovereign debt again

Seriously, haven’t our pollies got anything better to do than conjure up such illogical nonsense like this? Given we’re at this level of discourse, perhaps walking, cycling or public transport would be a better bet for our lawmakers. At the very least it would put them in touch with how commoners live.

Tesla worth more than major brands with 1,046 years of combined experience

Wonderful to see Wall St bull at its finest. Trip Chowdhry of Global Equities Research put a 2030 price target of $4,000 on Tesla or around 10x the current price.

Amazing to think that he believes that Tesla would be worth 25% more than Toyota, VW, BMW, Daimler, Ferrari, Honda, Nissan, Mazda, Ford, GM & Fiat-Chrysler combined.

Sure, that’s plausible. Who wouldn’t believe that the industrial might of the aforementioned world’s most respected brands – with a combined 1,046 years of production expertise – will be worth less than a company who is led by a dope smoking CEO who cares little for corporate governance?

That isn’t to say innovation and disruption can’t end a millennia of progress. The only problem is the market fails to realize is that Toyota invests 10x what Tesla does in electric vehicle R&D every year and had its research geeks develop solid state lithium ion batteries for fun.

Is BMW hurting bad enough to offer 10yrs free servicing?

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10 years? Sounds a bit desperate. A bit like the Korean makes a few decades back using monster incentives to lure customers by a value to good to refuse proposition. Have luxury car sales become so hard to get in Australia that the prestige make has to offer 10 years of free servicing and 1yr free insurance?

BMW sales in Australia fell 12.2% year on year in August 2018. Audi crumbled 25.8%. Benz did better at -3.4%. Land Rover fell 32%, Lexus down 11.7%. Porsche crumpled 25.4%.

It is likely the fine print in the 10 years free servicing basic package isn’t transferable between owners so if most buyers hold their BMWs for 5 years the total incentive is much less to roll out. If the fine print allows transfers it only adds to the desperate state of having to hurl freebies to shift metal. Dealers tend to make less on the sale of the car but plenty on gouging customers for service and spares.

Seems the tyres are going flat. Total car sales in Australia were down 1.5% in August. Passenger car sales fell 13.4% while those eco conscious Aussies bought 8.3% more SUVs. Medium and large sedan segments fell 24.1% and 60.3% respectively. Every SUV segment rose except upper large. Toyota finished up 1.7% for the month with 19.8% share.

Is Musk losing it?

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Is Tesla CEO Elon Musk losing it? More senior resignations from accounting and HR this week  reveal more cracks in the automaker. He emailed a journalist, calling him a “mother f*cker”. He went further to say he hoped the cave rescuer he called a “”pedo” sued him because a UK man who is single and spent so much time in Thailand must be a child rapist.

He rattled off he had “secured” funding of $420/share to go private and then all of a sudden he didn’t, prompting the SEC to investigate. He was then on radio with comedian Joe Rogan toking what is reportedly a mixture of tobacco and marijuana. Are these the actions of a man running a $50bn market cap company?

Clearly his board can’t control him.  With the shares collapsing and bond prices falling, refinancing will become problematic. Chief  Accounting Officer Dave Morton quit the company after revealing his concerns about the various obstacles Tesla faces.

Tesla’s Chief People Officer, Gabrielle Toledano, took leave in August and said she wouldn’t be returning to Tesla.

Musk has been a genius and visionary to get Tesla where it is today. Yet he is a direct victim of his own hubris. Sleeping under boxes with Tesla bankrupt written on them to living on the factory roof to rattling off about production hell while accusing families of drivers dead due to over reliance in a system he aggressively promoted.Tesla was technically asking for suppliers to refund a portion of the monies they were paid since 2016 to the EV maker so it could post a profit which is borderline accounting manipulation in an attempt to give the impression of an ongoing concern.

He also complained at the lack of support in the media despite being called out on this nonsense.

Musk’s compensation is also linked to a $650bn market cap, which is effectively saying to the market that his company will be worth more than Daimler, BMW, VW, GM, Ford, Toyota, Nissan, Honda, Renault, Fiat-Chrysler, Ferrari and Porsche combined. Just read that last sentence again. Do investors honestly believe that Tesla which consistently misses and is going up against companies that have been in the game for decades, seen brutal cycles, invest multiples more in technology and forgotten more than they remembered will somehow all become slaves to a company which has no technological advantages whatsoever?

The Tesla story is on the ropes. Expect more mega-releases on new products to try to keep the dream alive and the disciples faithful. I guess ‘Lucy in the sky with diamonds’ worked for The Beatles…

The day Elon Musk gets asked by…

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Elon Musk said in the FY2017 conference call today: “Super Bullish…What I find sort of interesting is that our competitors – the car industry thinks they’re really good at manufacturing. And actually they are quite good at manufacturing, but they just don’t realize just how much potential there is for improvement. It’s way more than they think…I went through this math I think on a prior earnings call, but like it sounds like some of the fastest car factories produce a car maybe every 25 seconds. That sounds fast. But if you think of a 5-meter long car, including gap, and a 4.5 meter car with a half meter gap or something, that’s only 0.2 meters per second. Like grandma with a walker can exceed the speed of the fastest production line we’re in, so really no that fast. Walking speed is one meter per second, so five times faster than the fastest production line on earth.”

Listening to commentary like this just shows how cavalier the processes at Tesla are. The day Tesla gets called in by other kings of industry for lessons on production techniques the comment will hold water.

Toyota, which has coined almost every manufacturing effficiency jargon over 50 years, was invited by Porsche to fix its problems in the 90s. Several years ago Toyota was called in to help Lockheed Martin streamline production of the F-35 Joint Strike Fighter because of the massive cost overruns. The day Boeing calls up Elon Musk for tips on how to belt out more 787s two slices of humble pie will be consumed immediately.

Seriously one has to question how this board can believe it has the potential to be worth more than all the other volume and luxury auto majors combined when they make such fictitious claims. Sounds like Sakamoto from Elpida promising endless dreams. Elpida went belly up because it failed to deliver. .

If a Toyota analyst covered Intel they’d be laughed at

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It sort of twigged. Why do some analysts have such loony share prices on Tesla? Take this Nomura analyst with a $500 target price which for a company losing $16mn a day would make it a $90bn market cap company, or more than BMW, Fiat Chrysler & Yamaha combined. However when looking at the analyst’s other coverage it is all tech stocks – Intel, Nvidia, Micron etc. So for a company like Tesla that competes in the auto industry, sells automobiles and has to abide by auto regulations somehow a tech analyst is the answer.. Perhaps a tech analyst covering autos is the way forward so they can put zany valuations to justify poorly executing companies. As an old autos analyst myself, if I told technology related investors I was covering Intel, they would laugh me out of the meeting room.

In any event maybe the Nomura analysts’ other coverage is wrong. Perhaps he should be comparing Tesla to all those other tech stocks that have been such dreadful investments, lost billions and floundered. I once did a study which showed that over the last 25 years that Intel made 60% more net income on its own than Sony, Panasonic, Sharp, Toshiba, NEC, Mitsubishi Electric, Hitachi, Fujitsu, Fuji Film, Canon, Nikon, Advantest, Tokyo Electron, Nidec, Konica Minolta, Casio, Seiko, Kyocera and Olympus combined.

Alitalia – what is it with airlines and government support?

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Last Friday Italy extended a bridge loan for Alitalia, which is in special administration as plans for it are determined by the state.  Italy’s cabinet has  passed an emergency decree to add a further 300 million euros on top of the 600 million euros it made to the ailing airline in May. It has extended the deadline for the repayment of the loan from November 2017 to Sept. 30, 2018.

Airlines are perhaps one of the worst industries as an investment one can find. High fixed costs, variable fuel prices, volatile economic cycles and intense competition. Yet with all of this, governments see them as national icons. Losing the flag carrier is viewed by some governments as a sign of economic impotence.

Several years ago, Japan Airlines went through a state-funded rehabilitation where the airline was able to overhaul its fleet while its legitimately profitable and unassisted competitor All Nippon Airways (ANA) got nothing. In the reverse poor old ANA was effectively taxed as its biggest rival got free kick after free kick from the government.

Qantas reported a $235 million loss in the last half of 2013 and cut 5000 employees to save the company $2 billion. The government was pressured to give state aid to prop up the airline but then PM Tony Abbott said, “because we do not want to be in the business of subsidising any single enterprise. It’s not sustainable in the long term”. So Qantas didn’t get help in 2014 and the airline has since rebounded and recently compensated its CEO Alan Joyce over $24mn as the shares have stormed 6x since the lows of 3 years ago. Most of the 5,000 let go have been recovered.

Which begs the question of state subsidies. When looking at Australia once again the state spent billions over decades to defend a bloated, inefficient and uncompetitive car industry. Nissan, Mitsubishi Motors, Toyota, GM Holden and Ford all closed local auto making opps. When businesses are subsidized, the necessity to reform is numbed. There is less need to get fit and look for efficiencies to get off the taxpayers’ teat. So even after 20 years and $12 billion spent to protect 45,000 jobs, all makers packed up and went home. Would have been better to write each worker a $250,000 cheque.

Of course some will argue that protecting jobs is a noble quest. Nobody likes seeing people unemployed. However if the rest of the world can make the same products cheaper and more efficiently why should consumers and taxpayers be forced to prop up those who won’t make the effort to reform.

Alitalia is yet another one of these businesses that is in the citizen’s pockets. If KLM and Air France can pair, Lufthansa and Swissair can join why shouldn’t Etihad back the initial investment it made in Italy’s national carrier. Another Loan is Time-warped, All Logic Is Abandoned.

Tesla – when the plug is pulled on subsidies

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It seems that the removal of generous electric vehicle (EV) subsidies in Denmark shows the true colours of those willing to buy a car in order to signal their willingness to save the planet. While Musk has been one of the most effective rent seekers around, it seems that if consumers aren’t given massive tax breaks they aren’t as committed to ostentatious gestures of climate abatement. In Q1 2017 alone it seems that Danish sales of EVs plummeted 60%YoY. In 2015 Danish Prime Minister Lars Lokke Rasmussen announced the gradual phasing out of subsidies on electric cars, citing government austerity and evening up the market. Tesla’s sales fell from 2,738 units in 2015 to just 176 in 2016. The irony of the Tesla is that it is priced in luxury car territory meaning that taxes from the less fortunate end up subsidizing the wealthy who can afford it!

Naturally if internal combustion engines (which by the way are becoming more efficient by the years as new standards are introduced) are taxed the same as EVs then it is clear they’d sell many more. Do not be fooled – car makers have not heavily committed to EVs for a very good reason – brand DNA. That is why we see so many ‘hybrids’ which allows the benefits of battery power linked to the drivetrain, which outside of design is the biggest differentiator between brands.

While many automakers missed the luxury EV bus, Tesla has opened their eyes. The three things the major auto makers possess which Tesla doesn’t are

1) Production skill – much of the battle is won on efficiency grounds. Companies like Toyota have had decades to perfect production efficiency and have coined almost every manufacturing technique used today – Just in Time, kanban and kaizen to name three.

2) Distribution – the existing automakers have been well ahead of the curve when it comes to sales points. Of course some argue that there is no real need for dealers anymore, although recalls, services (consumables such as brakes) and showrooms are none-the-less a necessity.

3) Technology – The idea that incumbent auto makers have not been investing in EV is ridiculous. Recall Toyota took a sizable stake in Tesla many years ago. Presumably the Toyota tech boffins were sent in to evaluate the technology at Tesla and returned with a prognosis negative. Toyota sold Tesla because the technology curve was too low. Toyota invests around $8bn in just hybrid technology alone per annum. Tesla spent $830mn last year as a group across all products. A ten fold budget on top of decades of investment in all available avenues of planet saving technology gives a substantial advantage.

Tesla is a wonderful tale of hope but it rings of all the hype that surrounded Ballard Power in fuel cells in the early 2000s. Ballard is worth 1% of its peak. As governments around the world address overbloated budgets, trimming incentives for EVs makes for easy savings. Now we have a good indicator one of the electric shock that happens when the plug is pulled on subsidies.

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